and non-traded sectors, labour market equilibrium requires LT+LN=1. Households maximize
utility U(CN,CT) subject to the budget constraint PCN+CT=Y, where P is the relative price of
non-traded goods in terms of traded goods and national income is defined by
Y≡PHNG(LN)+HTF(LT)+HTQE. Optimality requires UN/UT=P. With CES utility, we have
CN= Y/(1+Pε-1)P where ε is the elasticity of substitution between traded and non-traded goods.
The equilibrium condition for equilibrium in the market for non-traded goods,
HN G(LN) = CN = Y/(1+Pε-1) = [PHNG(LN)+HTF(LT)+HtQE Y]/(P+Pε),
yields Pε=H[F((1-LN))+QE]/G(LN), where H≡HT/HN is the productivity of the traded and
resource sectors relative to that of the non-traded sector. This equation corresponds to the
NTGME-locus in fig. 2 and describes those combinations of the real exchange rate P and the
share of labour employed in the non-traded sector LN that ensure clearing of the market for
non-traded goods. The NTGME-locus slopes downwards, since a higher P is associated with
relatively lower demand for non-traded goods and thus with fewer workers employed in the
non-traded sector. Labour mobility between traded and non-traded sectors requires that labour
is paid the same in each sector, so that the value of the marginal product of labour is equalized.
This yields the LM-curve PG'(LN)=HF'(1-LN), which gives those combinations of the real
exchange rate P and the share of labour employed in the non-traded sector LN that ensure
labour market equilibrium. The LM-curve slopes upward. A higher relative price of non-
traded goods P pushes up the value of the marginal product of employment in the non-traded
sector, so employment in the traded sector must decline in order to push up the marginal
product of labour in the traded sector.
Higher natural resource revenue QE boosts national income and demand. Hence, the
NTGME-locus shifts upwards, the LM-locus is unaffected and equilibrium in fig. 2 shifts
from A to A'. The short-run consequences of higher resource revenues are thus appreciation
of the real exchange rate (a higher relative price of non-traded goods P), decline of the traded
sector and expansion of the non-traded sector. Labour shifts from the exposed to the sheltered
sectors. This boosts both consumption and output of non-traded goods. The rise in
consumption of traded goods and the contraction in the production of traded goods is made
possible by additional imports financed by the increase in resource revenues. National income
rises by more than natural resource revenues (dY=HTd(QE)+CNdP > HTd(QE)). The natural
gradually thereafter; uncertainty about future commodity export prices seems to increase long-run
inequality (Goderis and Malone, 2010).